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Wednesday, September 12, 2007 12:57 PM

Global Savings Glut Exposed

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In a long winded article Bernanke is yapping once again about Global Imbalances and the Global Savings Glut. The article is complete with charts and 11 footnotes but mostly twisted logic as well as stunning statements like "There is no obvious reason why the desired saving rate in the United States should have fallen precipitously over the 1996-2004 period."

Actually, there is every reason for the U.S. savings rate to have fallen: The Fed continuously held interest rates too low thereby creating a negative incentive for anyone to save. Eventually a near unanimous belief set in that asset prices were a one way street headed North and the purchasing power of the dollar a one way street headed South. So why save?

And after the Greenspan Fed foolishly cut rates to 1% in the wake of the dotcom bust, there was a mad dash out of cash, culminating with panic buying of houses. That panic in turn was followed by cash out refis to support consumption as people bit off more house than they could really afford. This is the origin of the much talked about negative savings rate. It is also one of the moral hazards of Bernanke's proposed inflation targeting scheme. For more on targeting, please see Inflation Targeting is Flawed.

Yes, it really is as simple as that.

Nowhere does Bernanke address those simple constructs. Instead his mind sits in long winded academic theory and models that do not even take into account real world constructs like global wage arbitrage, asset bubbles, overcapacity, U.S. deficit spending, the War in Iraq (that has to be funded somehow, and if not by domestic taxes then by foreigners) or disincentives to save caused by interest rates held too low too long.

But there is now no way to pay back what has been borrowed as there are no real savings. In Austrian Economist terms, the pool of real funding is simply tapped out. And once psychology changed, there was a mad scramble for cash with no bids for commercial paper as all the savings (and then some) had already been lent out. The result is a credit crunch and a new dance craze called The Bernanke Shuffle.

Additional Reasons Banks Won't Lend

a) Banks fear not getting money back because of poor collateral and massive duration mismatches. (See Duration Mismatch Causing Severe Stress Everywhere).
b) Banks like Citigroup are reluctant to lend cash because they to fund their own off balance sheet investments now heavily underwater. Consider this a margin call on off balance sheet funding.
c) Citigroup (C) as well as JPMorgan Chase (JPM), Lehman (LEH), and Bear Stearns (BSC) are all stuck with LBO commitments that the debt markets are now unwilling to fund, so those corporations are tight with cash.

Points b and c above were discussed in Swaptions and Financial Turmoil.

Emperor With No Clothes

The U.S. is clearly buying more than it can afford as well as gambling more than it has. Proof of that statement can be found in soaring foreclosures, perpetually rising consumer and government debt, and unfunded liabilities kept off the balance sheets. We are now (finally) starting to see the expected result: a credit crunch.

In essence the "Savings Glut" is nothing more than an optical illusion that confuses "savings" with "debt" while ignoring U.S. deficit spending, consumer credit binges, and trillions of dollars blown in Iraq, all in the face of Fed policies that discourage saving every step of the way.

No matter what Bernanke's model suggests, an unsupportable consumption binge in the U.S. does not mathematically translate to a "glut of savings" elsewhere.

And given his inability to distinguish between "savings" and "debt" as well as his reliance on mathematical models and academia instead of real world practicality, Bernanke keeps reinforcing what we already knew: Bernanke is a Complete Fool.

Picture Bernanke as the "emperor with no clothes" (Image thanks to Wikipedia) where his proposed "Savings Glut" is easily exposed as nothing more than a speculative credit binge now going bust. The construct is so simple that even a brilliant Ph.D can't figure it out.

Mike Shedlock / Mish

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